A New Confidence in Construction?

The NAHB index notches a slight rise, suggesting a lift in builder confidence as sales show signs of improvement, especially in the South

U.S. homebuilders seem to be coming out of hibernation as the gloom over the housing market begins to lift.

Builder confidence in the current market for newly built single-family homes rose three points in July, to 17, the highest level since September 2008, according to a National Association of Home Builders/Wells Fargo Housing Market Index released on July 16. Another index measuring the traffic of prospective buyers rose 1 point to 14. But the index that gauges sales expectations for the next six months stayed flat at 26.

The South posted the strongest gain, rising 5 points, to 20. The Northeast dropped 3 points, to 16, while the Midwest and the West remained unchanged, both at 15.

All three indexes show that builder confidence is extremely low: Any reading below 50 is poor. The homebuilder confidence index dropped to a record low of 8 in January after peaking around 70 during the housing boom.

Deeply discounted home prices, low interest rates, and tax incentives have brought out first-time home buyers. But foreclosures continue to rise, which will keep pressure on home prices.

still "every reason" for pessimism

Zach Pandl, economist with Nomura Securities in New York, said builders remain pessimistic. Their change in mood might be better described as "less gloomy, he said.

"We're still a very long way from the [index's] 50 break-even level," Pandl said. "Homebuilders have every reason to have a pessimistic outlook now. They have a huge amount of competition from excess inventory, including foreclosed properties. There's very little reason to think that this will be cleared any time soon."

The good news, according to Patrick Newport, the U.S. economist at IHS Global Insight, is that single-family home starts probably have already hit bottom.

Those builders that have managed to hang on are in for better times, Newport said.

Economists are eagerly awaiting the June report on housing starts and building permits that the Commerce Dept. will release on July 17. But the May report was encouraging and suggested the market might be at—or at least close to—a bottom. Single-family home starts rose 7.5% in May, the third consecutive monthly rise. And building permits jumped 7.9% for single family homes, a promising sign for future construction activity.